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Unformatted text preview: >> H O U R LY WAG E S What you will learn in this chapter: Why efforts to collect an infla- tion tax by printing money can lead to high rates of inflation How high inflation can spiral into hyperinflation as the public tries to avoid paying the inflation tax The economy-wide costs of infla- tion and disinflation, and the debate over the optimal rate of inflation Why even moderate levels of in- flation can be hard to end Why deflation is a problem for economic policy and leads policy makers to prefer a low but posi- tive inflation rate c h a p t e r 393 16 that economists use as a rough dividing line between merely high inflation and hyperinfla- tion . Yet Brazils experience was actually quite mild compared with historys most famous example of hyperinflation, which took place Inflation, Disinflation, and Deflation 3,000% 2,500 2,000 1,500 1,000 500 Inflation rate Year 1 9 8 1 9 8 5 1 9 9 1 9 9 5 2 2 4 S o u r c e : I n t e r n a t i o n a l M o n e t a r y F u n d . N MODERN AMERICA, WE COMPLAIN about inflation when the overall level of prices rises a few percent over the course of a year. But those who lived through the late 1970s scoffthey remember when prices rose as much as 13% in a year. And in other times and places, in- flation has gone much, much higher. For example, the accompanying figure shows the inflation rate in Brazil from 1980 to 2004. As you can see, there were many years when the Brazil- ian inflation rate was in triple digitsand even years when it went into four dig- its. For a sense of what it felt like to be a Brazilian con- sumer during this period, consider what happens to the price of a gallon of gas over the course of a year at an inflation rate of 3,000%, equal to Brazils inflation rate in 1990. At that rate, a gallon of gas that cost $3 at the beginning of the year would cost $90 by the end of the year. In some months, infla- tion in Brazil briefly reached the 50%-per-month level You call what weve seen in the United States inflation? As shown in the graph above, between 1985 and 1995 Brazil demonstrated what really serious inflationup to almost 3,000% per yearlooks like. In 1992, hoping for relief, Brazilians were out on the street demanding new leadership. I C a r r i o n C a r l o s / C o r b i s S y g m a Brazilian Inflation Rate, 19802004 394 PA R T 6 THE SUPPLY-SIDE AND THE MEDIUM RUN Money and Inflation Even though inflation in the United States is much lower today than it was during the 1970sand a far cry from the recent experience of Brazilthe American public and media still pay close attention to inflation. Ask any American to name some seri- ous problems that an economy faces and chances are youll hear the word inflation....
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This note was uploaded on 05/18/2010 for the course BU204 MACROECONO taught by Professor Joseruiz during the Spring '09 term at Kaplan University.
- Spring '09